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Foreign Currency Intermediation: Systemic Risk and Macroprudential Regulation

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  • Bitar, Joseph

Abstract

Despite the progress made on the empirical front, normative analyses are still lacking when it comes to foreign currency intermediation (partial dollarization of the domestic banking system) and the ways to address its systemic risks implications. In this paper, we make a comprehensive analysis of the liquidity and the foreign exchange (FX) systemic risks implied by foreign currency intermediation. We explain the trade-off between the positive effect of foreign currency intermediation on growth in tranquil times and its negative effect in terms of financial fragility. We review the narrative and econometric country studies that have been done so far to assess the effectiveness of FX-related macroprudential measures. Through the results of past studies and a comparison of the experiences of Latin American and transition European economies, we show the advantages of administrative macroprudential measures over price-related measures in dealing with liquidity and FX systemic risks. We show that neutralizing those systemic risks is possible without aiming at directly limiting or banning foreign currency intermediation (i.e., dedollarizing). We argue that dedollarization is a more ambitious target that must be justified by the other inconveniences of foreign currency intermediation, and we stress that sound monetary management should be a prerequisite to dedollarization.

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  • Bitar, Joseph, 2021. "Foreign Currency Intermediation: Systemic Risk and Macroprudential Regulation," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 2(2).
    • Handle: RePEc:eee:lajcba:v:2:y:2021:i:2:s2666143821000089
    DOI: 10.1016/j.latcb.2021.100028
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    More about this item

    Keywords

    Foreign currency intermediation; Dollarization; Systemic risk; Macroprudential regulation;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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